Will GUESS Defy Gravity And Continue 45 Degrees Uptrend?

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Feb 14 2007
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Guess?, Inc. (NYSE: GES, stock) has confirmed to announce its’ earning today, Wednesday, Feb-14-2007, after market close. Guess? designs, markets, distributes and licenses a lifestyle collection of casual apparel and accessories for men, women and children. Its apparel is marketed under trademarks, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, Question Mark and Triangle Design, BRAND G, a stylized G, GUESS Kids, Baby GUESS and MARCIANO.
Rating Indicators for GES:
  • Wall Street consensus : 0.93
  • StockScouter rating : 4 / 10
  • Whisper Number for this stock : N/A
  • Schaeffer rating for this stock : 8 / 10
  • Power Rating : 4 / 10
  • Insider Trading (last 52 weeks) : ($268.46M)
  • Zacks Analysts Rating: Moderate Buy
  • Option Trading: June 2007 75 Call
  • Implied Volatility (IV) for June 2007 $75.0 Strike : 41.28%

Sales, Income & Growth – For the past 12-months, GUESS registered $1.12 Billion sales versus the industry’s $3.01 Billion. Income amounted to $103.29 Million against the industry’s $216.06 Million. While GUESS 12-months sales growth is at 27.20%, the income growth is in the region of 134.70% (the same industry sector sales growth is at 12.20% and income growth of 26.70%).

Profitability & Financial Health – For the past 12-months, net profit margin is in the region of 9.3%. GUESS has a debt/equity ratio of 0.22 compare to industry’s ratio of 1.90.

Stock Resistance & Support Level – The resistance is at 78.85 (52-week high) while the first level support is at 67.86 (50-day moving average).

Risks – The price-to-earnings multiple, 33.70 is higher than the average industry level. Two or more executives, board directors or major shareholders – including one high-level executive: sold a large number of shares recently.

Though all the figures above points to a pessimistic view, especially when there’re quite a number of high-level executives selling GUESS stocks, I still think GUESS will be able to beat earning estimate. But I wouldn’t bet my arm & leg on this stock, perhaps a small amount of Call options. Note that Feb 2007 70 and 75 Put option has been bid-up at this moment – could the insiders know something bad about this stock? But it could be someone playing spread strategy as well.

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I know this is a little after the fact, but from EarningsWhispers’ newsletter regarding Guess:

The problem with trading Synaptics now is there is no near-term catalyst. To trade a stock near its support or resistance levels, it is often better to trade around a catalyst to push the stock in the other direction. An earnings report is a common event to give a stock near its support level a price shock to move it back towards its resistance level. Therefore, a more interesting stock to follow this week is Guess? (GES) because it has not only sold off since reporting positive guidance recently, but is also scheduled to report earnings this week.

The stock has been on a tear lately, with the price doubling in the past year. The company grew earnings by 98.5% in 2005 and 99.2% in 2006, but despite analysts raising their 2007 estimates by 75% in the past 10 months, current estimates call for earnings growth of just 19.9%. Furthermore, despite all that growth, the stock has typically traded at just 23.1 times forward earnings estimates and is currently trading at 23.3 times 2007 estimates. This suggests the stock price has not gotten ahead of its earnings and as long as future earnings expectations continue going higher, so should the stock price.

Every time the company has released earnings since May the company has also provided guidance above the consensus estimates. Plus, the company has provided positive guidance two additional times in the past year, including January 18, 2007 when management said it expected fourth quarter earnings of $0.91 to $0.93 per share – above its previous guidance of $0.65 to $0.67 per share and the consensus earnings estimate of $0.69 per share at the time. The stock jumped on the news and traded to a new 52-week high of $78.85.

The company did not provide 2007 earnings guidance, but analysts immediately raised their estimates from $2.87 per share to $3.13 per share. In addition, Caris & Co. raised their target price for the company to $78 from $73; WR Hambrecht raised their target to $82 from $75; and Brean Murray raised their target price to $90 from $80, yet the stock is down 7.5% since then.

The company is scheduled to release earnings after the market closes on Wednesday, February 14, 2007 and, with the company’s recent guidance, fourth quarter earnings won’t be an issue unless it reports above its guidance of $0.93 per share. This is not out of the question. In June, the company said it expected to beat expectations at the time by $0.05 to $0.07 per share. Analysts quickly raised their estimates six cents higher to $0.21 per share, but in August, the company reported earnings of $0.30 per share. The primary difference is the company’s recent guidance came three weeks after the quarter ended, while the guidance in June came with more than three weeks remaining in the quarter.

So the primary focus will more likely be the company’s guidance. With the company trading at a PE above its peers and inline with its average multiple, the company will likely need to raise guidance again not only to increase the denominator, but to also justify a higher multiple. Still, with the stock trading down from its recent high, it likely won’t take too much good news to push the stock higher again.

Our analysis of the implied volatility of the stock’s options prices suggests the stock price will move more than 4% on the news. If the stock truly is at a support level, then this implies the stock will move higher on the news and test its recent resistance level.

thanx chris for your newsletter,

hope you made money from the newsletter … i agreed that guidance has become one of the most valuable commodity during earning announcement … though i can predict almost 90% accuracy whether a stock will beat/miss the earning, i almost fall helpless to their guidance which can go either way … but with good fundamental, most of the time the stock will correct itself – the same reason i always stress the importance of time-value …

i’m still holding the GUESS call, might sell it off friday, feb-16 to lock-in profit … i hope you have taken (or going to) money off the table as well …

cheers …

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